Jim Rickards on the ‘Australian Peril’

[Publisher’s note: As part of Jim Rickards’ New Case for Gold Package you get a protected passcode to an exclusive sit-down we had with Jim. The topic: How Australia is going to fare in the next monetary reordering, and the role gold will play in that. In short: Australia has a perilous economic future, and gold, believe it or not, has some responsibility for that.  

It was fascinating. You should watch it now.

It’s yours to download and watch immediately, while your physical copy of The New Case for Gold is making its way to you in the mail. I recommend you claim the Package today, if possible. As soon as the 7,000 books are dispatched (which could be as early as next Tuesday or Wednesday), the whole promotion ends. Your chance to nail a Special Edition expires, as well as all the other bells and whistles we’ve put together, including this exclusive video session.

Don’t delay another second. You’ll regret it. To learn more about the Jim Rickards’ New Case for Gold Package, click here.

For now, a taster… Here’s a transcribed extract of our exclusive Port Phillip Publishing session with Jim Rickards…]

An Interview with Jim Rickards on Australian Gold

Precious metals shine in the aftermath of great crashes. Will it be any different this time around? Is the scope for gold and silver price rises even larger, given that the rise in US stock markets has been so spectacular?

JIM RICKARDS: There are a number of reasons to buy gold. The notion that there could be a market crash and the price of gold might go up; that’s one of them, but it’s not the only reason.

By any means, there are many vectors…there are many factors that affect the price of gold. There could be what’s called the ‘fear trade’. Everyone is worried. Stocks are going down. Bond markets are shaky, junk bonds are collapsing. So I’m going to run into gold as the safe heaven. That’s a legitimate strategy for a portion of your portfolio.

But there are other more subtle things that could cause the dollar price of gold to go up quite a bit. One of them obviously is inflation. Just because you have inflation, doesn’t mean that you have a market crash. It could just be that the technical term is the velocity of money is going up. Look at the late 1970s, from 1977–1981. There was some stock market volatility then. We had a couple of recessions although the market came back…but the price of gold was skyrocketing not because of the stock market, but because of inflation. Inflation is a factor.

Another one is real interest rates. Everyone focuses on the interest rate that they hear about in the news. That’s the nominal interest rate. But the real interest rate is the nominal interest rate minus inflation or plus deflation. Generally, a negative real interest rate is very good for gold. People say interest rates are really low right now. In nominal space they are, but in real space they’re not. Real interest rates are still high. I remember when interest rates were 13%. People say that was high. But the real rate was negative because inflation was 15%! If you have an interest rate of 13% and inflation of 15%, the real rate is actually -2%. That’s a very, very low negative real rate.

Those negative real rates are very good for gold. That was the time I’m referring to. It was the late 1970s to early 1980s. Again, it doesn’t necessarily correspond to a stock market crash.

Yes, financial panics and financial collapses are one reason to have gold. But they’re not the only reason. I don’t think gold investors should sit around waiting for that. It’s good to be prepared if it happens. There are other threats out there, including inflation — another possibility of negative real rates that central banks are trying to engineer. And other factors…other reasons to have gold.

Think of it as fire insurance on your house. There might be a hundred ways for the house to burn down, but the insurance policy pays off for every single one of them. Again, nothing you want, but you’re glad to have the protection in case it happens.

In August 2012, you told Port Phillip Publishing readers in Sydney that the US was the Saudi Arabia of gold reserves and China was a gold pigmy.

China has since been stockpiling massive amounts of gold. We don’t know exactly how much, but we know they’re now one of the major players in the Gold Club. What’s changed since 2012? Why has China been doing this?

A lot has changed since 2012. By the way, that was a memorable visit to Australia. I’ve been coming to Australia for over 35 years. All over…from Sydney to Melbourne, Adelaide, up in Brisbane, up in Haman Island, off the coast of the Great Barrier Reef near the Coral Sea. I actually had a very interesting visit to Alice Springs and drove from Alice Springs to Uluru. We drove a round trip 700 miles in the outback. Australia is one of my favourite countries. I love visiting there. That was a very memorable visit.

I was correct that the Chinese gold position was small relative to its GDP. It didn’t mean they didn’t have any gold. It just meant if you look at the ratio of gold to GDP, how big [China’s] economy is, and how much gold you have to support it…they had a very low ratio.

That has changed a lot.

China has been acquiring thousands of tons of gold. Just to put that in perspective, there are only 35,000 tons, approximately, of official gold in the world. When I say official gold, I mean gold owned by countries, owned by central banks, owned by several wealth funds. I’m not talking about private gold and jewellery and what investors have, but just what the governments have. It’s about 35,000 tons. China has acquired, by my estimate, something like 5,000 tons in the last six years. That had started…that accumulation had started by 2012. It has accelerated greatly since then.

Bear in mind, China is completely non-transparent about this. They do not accurately report their gold holdings. They do report them, but they hide a lot of the gold. The People’s Republic of China currently admits to having about 1,600 tons; a little bit more than that. But China actually has closer to 5,000 tons.

Where is the rest of the gold? They have another agency called the State Administration on Foreign Exchange (S.A.F.E.), or SAFE. The gold’s in the SAFE. That’s non-transparent. It’s off the books. They’ve got the gold. How do we know they have the gold? We do have some data. We know that their mining output is about 450 tons a year. If you take 450 tons a year by six years, there’s over 2,500 tons right there. We know that imports [come into China] from Hong Kong. Hong Kong actually does have accurate reporting unlike the People’s Republic of China. We know from Hong Kong imports that they’re taking in just under a thousand tons a year again for [the past] six to seven years. You start to add all these up and you get to a number that is approaching 9,000–10,000 tons.

What we don’t know exactly is how much of that gold went to private consumption in China; in other words, individual Chinese buying it, and how much went to the government. We’re not sure of that, but my estimate is 50:50. That’s the best estimate you can make in the absence of better information. Putting all that together, I would say that, today, China does have around 5,000 tons. Relative to its economy, they’re not a pigmy anymore. They’re on a par with the US.

Australia has a long history with gold, ranging back to the first New South Wales gold rush in 1851. Today Australia accounts for around two-thirds of gold mine reserves. But while Australia has a lot of gold in the ground, the Reserve Bank of Australia has a relatively tiny inventory of gold. What is the disparity between Australian gold in the ground and officials reserves?

Should the RBA stockpile more aggressively?

When it comes to gold, gold in the ground, and gold mining, there’s no question that Australia is a superpower. In terms of its gold reserves, they are quite large. In terms of its gold mining output, one of the 10 largest in the world — and has been for a long time. But that’s different from official gold or government reserves. When it comes to government reserves, the Reserve Bank of Australia, the RBA, is actually pathetically small relative to the size of the Australian economy.

Australia, because its economy is significantly smaller than, say, China or the US, it doesn’t need as much gold. But if you just do a ratio of gold to GDP…that gives you an apples to apples comparison across the board. Australia has very little gold relative to the size of its economy, which is a significant size.

You have this disparity between private gold, gold mining on the one hand, and official gold on the other. Official gold is what counts in terms of the international monetary system. If there is a collapse in the international monetary system, which I do expect…

By the way, that’s not an extreme statement. The international monetary system has collapsed three times in the past 100 years. It does seem to happen every 30 or 40 years. It’s been 40 years since the last one in the mid 1970s. That doesn’t mean there’s going to be a collapse tomorrow, but it does mean that no one should be surprised if there is. That seems to be the shelf life for proximity of the international monetary system.

When the collapse comes, and you have to reform the system, I’m not saying it’s the end of the world. We’re not all going to be living in caves and eating canned goods. The major powers in the world will sit down around the table as they did at Bretton Woods in 1944…and at the Plaza Hotel in 1985…and at the Genoa Conference in 1922. They sat down and they reformed the international monetary system.

The question is: How big is your seat at the table? How much of a voice do you have?

The more gold you have, the bigger the voice you’re going to have. Just because there’s a lot of gold in the ground in Australia, it doesn’t mean it’s very easy to dig up. It’s actually costly. Australians know more about mining operations than most people around the world because it’s such a large part of the economy. It’s good that the gold is there, but it’s not cheap or easy — or fairly inexpensive or even quick — to get out of the ground. The Reserve Bank of Australia should be increasing its gold reserves. They’re not going to have a very big seat at the table when it does come time to reform the system.

 

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Jim Rickards

James G. Rickards is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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